CTS Corp (CTS) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CTS Q4 and full year 2011 conference call. At this time all participants are in a listen-only mode, and later we will conduct a question and answer session with instructions being given at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the call over to your host, Director of Investor Relations, Mr. Mitch Walorski. Please go ahead, sir.

Thank you, Keely. Good morning. I'm Mitch Walorski, Director of Investor Relations, and I will host the CTS Corporation fourth-quarter 2011 earnings conference call. Thank you for joining us today. Participating from the company today are Vinod Khilnani, Chairman of the Board and CEO, and Tom Kroll, Vice-President and Chief Financial Officer. Before beginning the business discussion, I would like to remind our listeners that the conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties was set forth in last evening's press release, and more information can be found in the Company's SEC filings. To the extend that today's discussion refers to any non-GAAP measures relative to Regulation G, the required explanation and reconciliation are available on our website in the Investor Relations section. I will now turn the discussion over to our Chairman and CEO, Vinod Khilnani.

Thanks, Mitch, and good morning everyone. Last evening we released our fourth quarter and full year 2011 financial results. The year was affected by disruptions due to the Japan earthquake and the fire at our EMS facility in Scotland earlier in the year, and again, major flooding in Thailand adversely affected our sensor business, electronic components, and EMS operations in the fourth quarter of 2011. Despite these back-to-back events, which materially affected many of our key customers like Toyota, Honda, Western Digital, et cetera, our full year sales were up 6.5%, and adjusted earnings per share were up slightly from $0.66 last year to $0.67 in 2011. Some of the sales and earnings impact from these natural disasters is expected to be recovered in 2012. New business awards and new product development activity stays strong.

We also signed an agreement to acquire Valpey-Fisher, an electronic components company with approximately $15 million in annual sales. The transaction did close the day before yesterday. We increased the pace of our stock buyback activity in the fourth quarter, and announced a 17% increase in our dividends to our share holders. 2012 should benefit from new business and new customer revenue, and some claw back from 2011 issues. As a result, we expect a strong 2012 at double digit increase in our top and bottom line compared to 2011.

Sales in the fourth quarter of 2011, at $144 million, were essentially flat compared to fourth quarter last year, due to approximately $11 million to $13 million of adverse impact from Thailand floods, offsetting the increased sales from our new products and programs in the quarter. Full year sales of $588.5 million were up 6.5%, despite approximately $22 million to $23 million of headwinds from Japan earthquake and Thailand floods.

Our Components and Sensors segment sales were $70.7 million in the fourth quarter, up 8.1% from the fourth quarter of 2010. Within this segment, sales of automotive sensors and actuators were $46.5 million, up 16.7% from the fourth quarter 2010, and up 11.7% sequentially from the third quarter. Two of our key customers, Toyota and Honda, normalized their production levels in the fourth quarter, and after being severely impacted in the second and third quarters, due to the Japan earthquake. Honda production was again disrupted somewhat in the fourth quarter due to Thailand floods. Continuing with our Component and Sensor segment, sales of electronic components in the fourth quarter of 2011 were $24.2 million, which was $1.4 million, or 5% lower year-over-year. This was primarily due to weakness in our distribution sales, as our distributors pushed to lower their year-end inventories by reducing their orders in the fourth quarter. In addition, the ramp-up of our new piezo product for disk drives was slowed in the fourth quarter, due to the impact of Thailand floods on our key customer. Many of our electronic component customers are staying cautious and keeping inventories low. However, new products and the Valpey acquisition will allow our electronic component sales to grow 15% to 20% in 2012 over 2011.

We are continuing our R&D and new product focus. Overall research and development expenses increased from 6.5% of Components and Sensors segment sales in 2010 to 7.1% in 2011. As a result, new products are helping improve our growth trajectory, and at the same time we continue to expand our portfolio of intellectual property. We were awarded 25 new patents in 2011. Noteworthy, 2011 new business awards, which will help drive 2012 sales growth, include active grill shutter actuator, a new pedal module for a popular global vehicle platform of a leading Japanese OEM, and new piezoceramic components for disk drives. More specifically, we won six new and two replacement sensor and actuator awards in the fourth quarter of 2011. In electronic components we recorded 85 new design wins in the fourth quarter, up 6% versus last year, and 264 design wins on a full-year basis were also improved year-over-year. Overall, total new business awards, helped by new products, were up 31% from $108 million total program revenues in 2010 to $141 million in 2011. Qualitatively, approximately 80% of new business awards were in Component and Sensor segment, indicating that over the several years Component and Sensor segment will grow faster and help enhance our operating margins.

Moving on to our EMS segment, sales in the fourth quarter of $73.3 million were $6.3 million, or 7.9% lower than the fourth quarter of 2010, primarily due to the shutdown of our Bangkok, Thailand facility. Thailand floods caused approximately $10 million in lost EMS sales in the fourth quarter. Key new programs contributing to growth in 2012 include medical applications for an orthopedic company and new industrial applications. The EMS focus in 2012 will be on margin expansion instead of just driving top line growth. Looking ahead to 2012, we expect to integrate Valpey-Fisher and launch several new products in our Component and Sensor segment. In addition, we expect some recovery of lost sales due to production disruptions at a couple of our key OEM customers in 2011.

Although our EMS Thailand factory will not be back to normal operations until June time frame, and the macroeconomic growth outlook, especially in Europe, is not very promising, we expect our total 2012 sales to grow in the range of 10% to 13% over 2011. Operating earnings are expected to grow a strong 20% to 22% over 2011, and be in the range of 5.3% of sales to 5.5% of sales, driven by improved segment mix and better capacity utilization. Earnings per share are expected in the range of $0.75 to $0.80, despite an expected higher effective tax rate and increased pension costs. Now I will turn the meeting over to Tom Kroll, our Chief Financial Officer, who will provide further details regarding our financial results. Tom?

Thank you Vinod, and welcome, everyone. Before I review the financial results in greater detail, I will comment on a couple of unusual items. First, we initiated a fourth quarter restructuring action costing about $2.4 million, with a payback of less than one year. This action will improve efficiencies, primarily within our Component and Sensor business segment, with an associated global work force reduction of approximately 100 employees. Secondly, as discussed in our last conference call, CTS was negatively impacted by the unprecedented floods in Thailand, which began early in the fourth quarter. The impact of the Thailand flood was much more extensive than anticipated during our last conference call in late October.

Also during the quarter, we finalized the property damage insurance recovery related to our second quarter 2011 EMS fire. The $3.4 million recovery, or about $0.07 per share, is shown separately on our statement of earnings. This amount is essentially in line with our expectations that we discussed during our last conference call. Also reported in our financials is the insurance recovery for business interruption of $2.2 million for both the Scotland fire and the Thailand floods. This amount is primarily a reimbursement of fixed burden expenses, shown in cost of sales. Therefore, if we include this amount in our cost of sales, the fourth quarter adjusted gross margins were 19.6%. We also recorded approximately $1 million of EMS incremental flood-related burden expense that negatively affected gross margins by about 70 basis points. This $1 million is expected to be recovered via our business interruption policy in 2012.

Now I'll go on to discuss the results. Our consolidated fourth quarter 2011 sales were $144 million, a 1% decrease from both prior year and prior quarter. Our adjusted gross margins were 19.6% versus 20.3% last year, and 19.4% last quarter. The Component and Sensors segment sales were 49% of total sales in the fourth quarter of 2011, versus 45% in the fourth quarter of 2010. This segment sales mix shift had a positive impact on our gross margins of approximately 1%, but was offset by the impact of higher precious metal costs and Thailand flood-related inefficiencies.

Our selling, general and administrative expenses were $16.8 million, versus $17.4 million last year, and $18.3 million in the prior quarter. The decrease from last year was primarily due to lower equity-based compensation expense. The third quarter 2011 selling, general and administrative expenses included an additional pension-related expense of about $600,000. The fourth quarter 2011 R&D expenses were $5.2 million, up almost $900,000 from fourth quarter 2010, driven by additional engineering expenses to launch new products, such as our piezoceramic hard disk drive products, actuators, et cetera. The fourth quarter 2011 R&D expenses remained at the third quarter 2011 spending level. Our fourth quarter net interest, currency, and other expenses were favorable by about $0.3 million to last year. The fourth quarter GAAP diluted earnings per share were $0.17 in 2011 versus $0.14 in 2010, and on an adjusted basis, our earnings per share were $0.22 in the fourth quarter 2011 versus $0.17 in the same quarter last year. Looking at the full year, sales were $588 million, up 6.5% from last year.

Our full year gross margin percent was 18.7%, versus 21.7% last year. Adjusting for the business interruption insurance recovery and restructuring-related charges, our adjusted gross margin was 19.4%, compared to 21.7% last year. Approximately half of the percentage decline is related to a segment sales mix, as we had a higher percentage of EMS sales in 2011 relative to 2010, 52% versus 49%. The other half of this decrease is primarily due to higher year-over-year commodity and precious metal costs, and certain new product costs primarily related to our hard disk drive product. Our full year selling, general and administrative were $71.9 million, or 12.2% of sales, versus $72.3 million, or 13% of sales in 2010. This improvement reflects continued prudent cost management. Our R&D expense was $20 million, or 7.1% of Component and Sensor sales, versus $18.3 million, or 6.5% in 2010. Increased R&D investments are helping us fuel future growth initiatives, such as our piezoceramic hard disk drive products and smart actuators in the Component and Sensor business segment.

Our full year adjusted operating margins were $28.7 million in 2011 versus $29.5 million in 2010. The 2011 results include the unfavorable gross margin impact previously discussed and higher R&D costs of $1.7 million, partially offset by property damage insurance recovery of $6.1 million. We did benefit from lower interest, currency, and other expense of $0.9 million relative to last year, primarily due to a stronger Chinese renminbi in 2011. We continue to assess our foreign currency exposure and strive for naturally hedged positions. Our overall tax rate was 20.4%, which was slightly lower than anticipated. The tax rate in 2010 was 21.4%. However, we do expect our full year 2012 tax rate to increase to approximately 25%, as our earnings mix shifts to higher tax rate jurisdictions, including the US, and certain benefits going away. Our diluted EPS were $0.60 versus $0.63 last year, and on an adjusted basis, our earnings per share were $0.67 this year versus $0.66 last year. Management estimates that the full year lost earnings impact related to the natural disasters, net of all insurance recoveries is a loss of $0.02 per share.

Now let's look at the balance sheet. Cash and cash equivalents were $76.4 million, versus $73.3 million last year, and our debt was $74.4 million, versus $70 million last year. We finished the year with a debt-to-capitalization ratio of 22% versus 20.3% last year. Therefore, net of cash, CTS was debt-free at year end. From a working capital perspective, our accounts receivable days improved to 54 days from 57 days last year, and our accounts payables stayed at an efficient 70 days, same as last year. However, our inventory increased $15.7 million during the year, directly affecting our cash position.

Our inventory turns decreased from last year, primarily due to Management's decision to satisfy customers impacted by the Thailand floods by quickly moving production from our flooded facility to other sites around the globe; this combined with some product launch and product consolidation activities. Our controllable working capital that we define as these three accounts, receivables, payable, and inventory, was 17.4% of annualized sales, and higher then last year of 16.8%. We expect our controllable working capital to steadily improve in 2012.

Our 2011 cash flow from operations was $22 million, an increase of 15% from last year's cash flow from operations of $19.3 million. The 2011 capital expenditures were $15.6 million versus $13.3 million in 2010. This was higher than last year, as we prepared to launch some new products. Our capital expenditures as a percentage of sales are still below our target of approximately 3%. Our full year free cash flow, which is defined as cash flow from operations, less net capital expenditures, which include net insurance proceeds received to replace property damaged in the UK fire, was $8.7 million versus $6 million in 2010. Although improved, this was below our expectations, primarily due to higher inventories as discussed before. Looking ahead, we expect our 2012 full year free cash flow to be the in the range of $16 million to $21 million.

A couple of other items. During the fourth quarter, we announced a 17% dividend increase, reflecting our confidence in future cash generation. We also continued our buyback stock activity, repurchasing approximately 257,000 shares for $2.2 million. During the full year 2011, we purchased approximately 400,000 shares, or about 1% of our shares outstanding at a cost of $3.6 million. Finally, a couple of recent 2012 items. Earlier this week, we closed on the previously announced Valpey-Fisher acquisition with net cash considerations from our existing bank revolver of approximately $17 million. Valpey-Fisher reported September 2011 trailing 12 month sales of $15 million. We expect this acquisition to be accretive in 2012. In early January, we amended our revolving credit facility, increasing the amount to $200 million from $150 million. This agreement has a five year tenure, expiring in January 2017, and does lower the pricing by 25 basis points. This concludes our financial overview. I will now open the call for questions, and thank you for joining us today.

Thank you.

(Operator Instructions)

One moment, please, for the first question, and we'll go to the line of John Franzeb at Sidoti. Please go ahead.

Vinod, regarding your guidance, it sounds like embedded in it is continued insurance recoveries, not only in the first quarter, but sounds like you are expecting it to continue through the second quarter. Is that the case, and if so, how much do you have embedded in that EPS number?

John, in the first quarter and second quarter, we expect some business interruption recoveries, which essentially will offset expenses which we are incurring, but that amount will depend on what our incremental expenses are. So, for example, if we incur $1 million in incremental expense in the first quarter, we expect, maybe with a few months lag, that money to come back. We look at that as essentially reimbursements.

In addition to that, we are expecting some small amount, I will estimate that that amount can be anywhere from $1 million to $2 million of what we call reimbursement because of the damage to our property in Thailand. So fairly small amount compared to what happened in 2011, but we may have a little bit of that extra revenues, which I will estimate $1 million to $2 million, in the first three, four months of the year.

Okay, and in the revenue outlook, I'm assuming you're including Valpey-Fisher in the top line expectations. Is that true, and how much you are assuming for Valpay?

We're expecting Valpay to generate approximately $15 million. That would reflect the revenue for roughly 11 months, because we just completed the transaction the tail end of January. So, we are incorporating those $15 million, which is roughly 2% of our growth coming from acquisition and the rest organic.

Okay, and could you just talk a little bit about Valpay and what was the thought process behind the acquisition and how do you expect that business to grow?

Valpay primarily is focused on engineered frequency products, and within our electronic component business, we have roughly $18 million of engineered frequency business. So, this essentially doubles, or more than doubles, our engineered frequency business, and that gives us a broader product range, and also takes the product range more towards military aerospace applications.

So, it broadens our product range, common customers, which allows us to get some sales and marketing synergy, and it also provides us a very small engineered frequency manufacturing base in United States, which allows to us cater to the military and aerospace customers, because our existing business has manufacturing base in Singapore. So we see good bit of synergy from the engineering organization, and sales and marketing organization, and therefore we are projecting that this acquisition, although small, will be slightly accretive in the very first year of its integration.

Will there be any associated consolidation restructuring costs with Valpay?

We were expecting a little bit, but that was covered in our restructuring costs in 2011, so I believe it is behind us.

I guess one last question, I will get back into queue. You mentioned that your distributors are keeping inventory low in your prepared comments.

Yes.

How much of your sales goes through distributors, and just talk a little bit about that. When do you expect to see that give way to maybe a normal seasonal selling cycle?

I would say a very small, maybe 10% to 15% of total CTS sales goes through distribution, and these are normally very large distributors, like Avnet and All American-type people, and the product we sell to distribution is a combination of what we manufacture in-house, and we do what we call buy-sell kind of product.

We did see that softening in the last four months of 2011. My expectation is that sometime in February, March, April time frame, after the impact of the Chinese New Year on the first quarter wears off, we expect that to bounce back.

On the positive side, we also recognize that the inventories are probably a little bit lower than normal in the distribution cycle, and digressing from this, I think, a little bit, our inventories to some of our key automotive OEMs are also materially less than what they would like to see. There's our confidence that those will bounce back, frankly starting from first quarter.

Okay. Thank you very much, Vinod. I'll get back in the queue.

Thank you. We'll move onto the line of Hendi Susanto at Gabelli & Company. Please go ahead.

My first question is, do you have operating cash flow target for 2012?

Hendi, we don't have a target, per se, but since we are not expecting CapEx to be materially different from this year, you can pretty much assume that if you add back $15 million, $16 million of our CapEx to our free cash flow, that will give you the operating cash flow targets.

Okay, and then when I look into your 10% to 13% sales growth for 2012 and calculate all of the estimates of the sales increase given in your latest presentations, I have $25 million in pedal modules, $7 million in grill shutters and turbo charger sensor, $15 million from Valpay-Fisher, $12 million in piezoceramic for hard disk drive, and an additional $4 million in electronics components. If I sum all of those I got 10.7% sales growth. What are other growth opportunities you are seeing aside from those?

How did you get my cheat sheet? Hendi, you are exactly right. We have openly talked about these large new programs which are kicking in in 2012 and ramping up, and we are counting on all of those to contribute to the sales. In addition to that, we expect some additional sales increase across the board in our base business, keeping in mind a somewhat mild growth prospect in the global economies. So, those combined with our normal base growth gives us confidence that we will have our sales in the 10% to 13% range.

Okay. Got it, and then looking at your fourth quarter, EMS operating margin was very strong at 4.2%, and in the previous earnings call, you mentioned 2% to 3% short term operating margin target for EMS. So, how should we think of this strong operating margin going forward into 2012?

I think, Hendi, Q4 is very muddy, because on the one hand they had a lot of disruptions and inefficiencies, because they were producing many of the Thailand products in California, and so we had direct labor which was duplicated.

We were replacing low-cost Thailand labor rates with high California labor rates, but the reason you see a high number is because it's convoluted, because included in that is the insurance recoveries. So, I would tell you that you should look at EMS as a normalized 2% to 3% operating margin next year, and the Q4 operating margin is overstated because of insurance recoveries.

Okay, and one bookkeeping question for Thomas. How much was your pension costs in 2011 and how much do you anticipate in 2012?

Well, the pension income in 2011 is roughly $3.5 million, and as Vinod mentioned in his remarks, we do expect that to have a negative impact on us in 2012 to the tune of $0.07, $0.08. So, we are not looking for any pension income in 2012.

So, Hendi, it is a key point. We had $3.5 million of pension income in 2011, and we are essentially projecting break even next year. As you know, many companies are experiencing the same trends, because the interest rates are low, which has lowered the discount rate.

Lower discount rates combined with lukewarm stock market performance in 2011 is affecting everybody's pension numbers. Fortunately in our case, it's more going from an income to a break even, and not increasing our costs. But what that suggests is, that we are projecting a strong earnings per share growth next year, even after absorbing a pension hit of roughly $3.5 million, which is $0.07 per share.

Thank you, and we'll move on to the line of Alek Gasiel at Barrington Research. Please go ahead.

Vinod, I know you've provided some details on the call, but maybe you can go over, provide a little more color, just some guidance on the sensor, actuator, electronic components, and EMS. Just provide a little more qualitative detail, if possible.

Sure. I think, as you know, we are expecting a fairly strong rebound in our sensor side of the business, which is driven by two things. One, it is driven by the fact that we have new customers and new products launching in that product family, which is going to give us a very, very strong growth next year, and that growth is going to get magnified, to some extent, because you know that that is an area, where in the second and third quarter of 2011, the sales were low because of the impact on Honda and Toyota.

So 2012 is going to benefit not only a bounce back from that side, but also new products. So we're going to have a very strong year on the automotive sensors and actuator side in 2012. Electronic Components Business, similar story to some extent. We have new products like the Piezoceramic Hard Disk Drive Business. Actually, it is ramping up as we speak. We should see that ramp-up visible in the first quarter of 2012.

So, that new product, combined with a couple of new customers launching, and fairly low inventories in the distribution pipeline, again gives us confidence that our electronic component business year-over-year should grow, as I said earlier, I think, around 20% range.

EMS, on the other hand, as you know, our strategy is to be a little bit more selective, and not necessarily chase new business and deteriorate our margins. Our focus there is going to be we want new sales, but we want to focus on our pricing and margins at the same time, and therefore we expect our EMS sales to grow, as we have consistently said in our investor presentation, in the mid-single digits. So, I would say anywhere from 4% to 6% growth, because we will be selective in that area.

So, again, we should see a segment mix improve, because components and sensors should grow strong, 15%, 20% range, and EMS should grow in 4%, 5% range, and that is one of the key drivers for operating margin improvement in 2012.

Okay. Thank you for that detail. Now, looking at the new business that you guys are going to be ramping up, is there any way of providing how that should fall throughout the quarter for the year?

We have few pieces which are launching in the middle of the year. So, the second half of the year would be a little bit stronger than the first half of the year, but having said that, because of some unique situations around the impact of fourth quarter this year, and a little bit product lines not being in the channels, we may not see necessarily that the first quarter would be our weakest quarter.

Our first quarter traditionally is the weakest quarter, and fourth quarter goes up. I would say the first quarter would probably more in line with an average quarter for the company. So, we should see improvements starting from the first quarter, but having said that, overall second half should be stronger than the first half.

Thank you. We'll go next to the line of Brad Evans at Heartland. Please go ahead.

I think you have already kind of hit on my question, but I'm just trying to understand why we wouldn't see a little more operating leverage than what you are forecasting in 2012. I clearly understand the shift in mix to components and sensors from EMS, but I am surprised that we are not seeing just a little bit more operating leverage. Are there are things that stand out to you as to why we are not seeing maybe a little more of an inflexion point there?

Sure. No, I think that's a very good point, and it probably helps us highlight a couple of things. So with the 10% to 13% top line growth, if you look at our EPS growth, it is not showing that leveraging, but that's why we wanted to highlight that a 10% to 13% sales growth should gives on operating income growth of 20% to 22%. So you will see leverage at operating income of 20% to 22%.

Now, the pension income is an above operating income line. So, we are absorbing a $3.5 million pension income change, and still signing up in our guidance of a 20% to 22% operating earnings. If you adjust for that $3.5 million to our operating margin, I suspect that 20% to 22% increase from a true operations point of view, would probably look more like a 30% to 35% increase.

You've got it. Okay. That's very helpful.

So, we are showing a very good leverage. The other comment which Tom made was, we are expecting our effective tax rate to increase from 20%, 21%, to 25%. And again, one of the reasons our effective tax rate is increasing is because we are seeing our earnings generation in US improve.

That affects the book EPS, but because you know that we have a tax loss carry forward from a free cash flow point of view, it is this kind of a change which is giving the board confidence to increase dividends, because they see not only cash flow improve, but the cash flow is being generated more and more in US, which gives them more flexibility to make those kind of decisions. So, just wanted to highlight that the leverage is there, and the second is that we are absorbing high tax rate, but it is a noncash hit we should see.

Okay. I appreciate that. I'm sorry, did you mention capital spending for the year? If you did, I missed it, I apologize.

Yes, we were, Brad, we spent $15.6 million.

I'm sorry, and you outlook for 2012?

We didn't provide an outlook, but again, our target is generally a little less than 3% of sales.

Okay. Let me just do a quick calculation here. So, per your free cash flow guidance, then to get to 16% to 21%, it looks like you're actually expecting working capital to be a use of cash in 2012? Is that correct?

It will be pretty close to where we are, but we are expecting improvements as we try to drive down the inventory levels.

So, that looks like your free cash flow guidance may be, indeed, conservative then, because looks like you could be choicer to 20% to 25%, but that is just how my math is shaking out.

Brad, one thing which we will change is that Tom is right. We will improve our working capital. However, the incremental sales will require us to absorb some. So, depending on what the incremental sales are, and where the sales fall, the mix of the sales, if there are some high sales in the fourth quarter, there may be a tail end need for higher inventory receivables and things like that. But you're right, depending on the mix of it, we may have an opportunity.

I'm sorry, is there a pension contribution that you're including in your free cash flow guidance?

No, Brad. We--.

No pension contribution.

Okay. That's good. So, Vinod, how much of your cash is in the US right now?

We essentially today have all of our cash outside the US, and that is one reason why we have the use of the revolving credit facility and the debt is in US, and free cash flow, not free cash flow, but all of our cash reserves are outside US.

Okay, and do you have an ending share count? I see the fully diluted share count, but do you have an ending share count reflecting the share buyback in the quarter? I guess what would be on the face of the 10-K.

We don't have that exactly, Brad.

We can cycle back to you, provide you that information.

Okay. Vinod, I'm just curious, can you just speak to my last question, just cash flow and capital, free cash flow allocation in terms of, I know it's been a frustrating, the Great Depression, or Recession, I should say. And then, obviously, while CTS is a relatively small company, we seem to have been hit by everything that happened geopolitically, with the exception of Libya, I guess, last year.

I'm just curious how you're thinking about deploying cash flow. I realize a lot of the cash is offshore, but it sure seems like buying back stock as aggressively as you possibly can would be a smart move.

Well, the board considers all uses of cash, all the way from dividend increase to buybacks, to acquisitions, and I would think that in the last three months we have demonstrated to our shareholders that we are capable of doing all three. We bought a small acquisition, did the small acquisition, Valpey-Fisher, for roughly $18 million.

We have, as Tom pointed out, we have ramped up our stock buyback in the fourth quarter, because we think that the stock was trading at lower than what we think the true values are there. And frankly, we increased our dividends, and I frankly don't remember when was it last time we increased our dividends.

So that's clearly a message the board was sending to the shareholders that we are willing to consider that, and so to be honest with you, I think we have a pretty good track record. You have here an organic growth, which is based on new products which we have developed and won.

We are using our cash for organic growth, we are using our cash for acquisition growth, we are using our cash to buy back, and we are using our cash from a dividend increase point of view. And I think the board will continue to evaluate based on the trends and the needs of the company, which they should.

Thank you.

(Operator Instructions)

We do have a follow-up from the line of Hendi Susanto at Gabelli. Please go ahead.

Maybe not one follow-up questions. Could you share insights into relative strengths and weaknesses you are seeing in defense, aerospace, communication, and industrial markets? I think we are hearing the mixed inputs about the (technical difficulty) inventory being at the low level, but at the same time, I heard some pocket of strength in certain products.

Hendi, overall the percent of business we have in defense and aerospace is relatively small, and if you look at the percent of our sales in defense and aerospace in component and sensor side, it's even smaller. I have heard from some of our customers, and the businesses, that they are seeing softness in defense and aerospace.

They saw that in the fourth quarter, and they are expecting that softness to continue in 2012. I don't see that as a material development for CTS for two reasons. One is, our profit contributions in sales from defense are relatively small, and, B, we have a good portion of our sales in homeland security-type applications, or drone applications, and things like that, which we believe are not going to be affected by the defense budget cuts.

Actually there was news in today's Wall Street that the Defense Department's strategy is to reduce the number of battalions, active battalions, and reduce what they call traditional military expenditures, but they want to dramatically increase their unmanned drone capabilities, and I suspect night vision and homeland security kind of initiatives will not be affected.

So I guess where I'm going with your question is that, yes, we have heard the same thing, that there is softness in the military and defense spending, and it did affect some pockets of our electronic components business. However, overall, it's not a material piece of information for CTS going forward, because our small sales are distributed pretty broadly between unmanned drone kind of applications to homeland security to night vision and things like that. So, I frankly don't see any material impact on CTS from that.

And how about in the communication and industrial markets?

Communication and industrial markets were pretty lukewarm, not very exciting in fourth quarter, and may stay soft in the first half of next year. We're not counting much on that. Our assumption is that the markets will be soft. Our growth projections are primarily driven by the new product launch, like high density disk drive applications, or actuators, or additional new wins on some global platforms on pedal modules.

Thank you. There are no further questions from the phones at this time, gentlemen.

Okay. I would like to remind our listeners that a replay of this conference call will be available from 1.30 p.m. Eastern Standard Time today to 11.59 PM on Thursday February 2, 2012. The telephone number for the replay is 800-475-6701, or 320-365-3844 if calling from outside the US. The access code is 231985. Thank you for joining us today.

Thank you, and ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.